Question

A company with total capital of $100,000 of which $65,000 is common stock would have a capital structure of 65% debt -35% equity 35% debt - 65% equity 39% debt - 61% equity 61% debt - 39% equity NEXT or Skip Question 2 4 A 7 8 9 10 11 1

Answer 1

Answer:-

1)There are two sources of financing available in the market, they are debt and equity financing.So the total capital structure consists of debt and equity.

In the given question the total capital=$100000

Given common stock(equity)=$65000

So,debt=Total capital-common stock(equity)=$100000-$65000=$35000

Therefore Common stock(equity) % in total capital=($65000/$100000)*100=65%

Debt % in total capital=($35000/$100000)*100=35%

It can also be expressed as 35% debt - 65% equity.Hence second option is correct.

2)Weighted Average Cost of Capital(WACC) includes both cost of equity and cost of debt.These two debt and equity constitute the overall capital structure of the firm.

When there is a change in the capital structure of the firm i,e.change in the equity and debt composition then there will be an impact on the weighted average cost of capital.

So,when there is a continuous change in total capital structure of the company which impact the equity and debt,leads to a variable weighted average cost of capital.First option is correct.